Financial Feasibility - Working Towards Profitability and High Margins
we use margins to measure our profitability. The profit margin is how we measure how much of our total income the revenue is left as profit by subtracting the expenses from our income. We get our profit or otherwise by adding our desired profit to our expenses. We get our selling price. Let's compare two companies, for example, X and Y. Last year X revenue was $1 million. Subtracting the cost of $900,000. X. Made a net profit of $100,000. So the company's profit margin is 10%. The company makes a profit of 10% of every dollar in revenue. Total income Company Y on the other hand, made double that amount last year and brought in $ million, subtracting $1,800,000 of expenses wise. Net profit was $200,000, which means profit margin was also 10%. So even though why may double the amount of income it is left with the same amount of profit as X. There are two ways to go about setting the right price and understanding the margins of your business. But first of all, let's understand the termino...
logy. The first term is cost. If we manufacture it could be cost of goods. This is the amount of money that we pay or the amount of money that doing the deal costs us. The second term is the selling price. This is the price we charge our clients. The third term is the margin, the margin is either added to the cost or reduced from the selling price. The bigger the margin, the more profit we make on every deal. So let's say we want to improve our margins first. We need to decide if we want to base our margin strategy on cost or on selling price. A business that knows exactly what it's cost is could probably quite easily based its strategy on cost. I know it costs me $100. So I need to sell my product for at least $200 In order to get a 50% margin. A business with a cost that changes often. Or that puts an emphasis on selling at a competitive price. Could perhaps more easily base its margin strategy on the selling price, meaning some deals cost me more than others to close. So I decide on the selling price and reduce the margin from it. That means that if for example, I know that I cannot sell for more than $200 In order to make sure that I get the 50% margin that, I need. We have to make sure that the costs are not more than $ cost plus margin equals selling price. If we wish to work with bigger margins and bring more profit from every deal, there are several things we should look at. One positioning. We need to make sure that we position ourselves in the right area of our industry, that we emphasize our specialty or in other words, what is the perception of our business in the target market based on our specialty positioning is the process of implementing the perception that we wish the market will have of us. Are we identified with having the best technology, speedy project delivery? Let's look at Tesla for example. Tesla is a great example for positioning. Is the company norm for fast delivery. Absolutely not. In fact, some of the company's clients order the products even before they go into production. What is Tesla known for then? Technology, they make the best cars as simple as that. Another point is paying power. We need to figure out what our target market is looking for and we must make sure that the target market to which we turn and in which we wish to position ourselves has the paying power to purchase accordingly, meaning if we turn to a market of college students for example, which is not famous for having an abundance of cash, we should probably make sure that we reduce our costs because we won't be able to sell at a high price point. The next point automation, the internet gives us a lot more abilities than we used to have to automate our selling process. The less time and effort we put into the process of closing the deal and working on the project, the lower the cost will be for us and our profit will increase. Let's do a reality check in the next lesson. Before we dive deep into the buyer personas and journey